As Greece more and more turns out to be unwilling or uncapable of leaving the Euro zone, economists have thought about alternative ways to increase their economy’s competitiveness. An interesting approach has now been formulated by two economists from Haravad and one from Princeton:
Even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation.
As the authors show, there are basically two policy options:
- increase both import tariffs and export subsidies
- increase VAT and lower pay roll taxes
In theory, these policies have zero impact on the fiscal budget but increase the country’s international competitiveness. Whether or not this can “solve” the economic mess in Greece, however, is more than disputable.
Swiss Economist 